Susan Tompor, Detroit Free Press Personal Finance Columnist
Most retirees — but not all — see household spending drop the first years in retirement. But the reductions might only be 5.5% to 12.5% in the early years compared with pre-retirement spending.
Dorethia Kelly, author of “#MoneyChat,” said people preparing for retirement need to start living on a fixed income before they retire.
- AARP and others suggest the time to crack down on spending is before you retire.
- A large percentage of new retirees spend more than they did while working, according to EBRI research.
- Transportation costs can fall by 25% in the first years of retirement.
Dorethia Kelly rattles off a checklist of get-ready-for-retirement strategies for the GenXers and Baby Boomers gathered at the Livonia senior center.
Measure the size of your nest egg, including evaluating how much money you’d have coming from pensions, IRAs, 401(k)s and Social Security.
Slay your debt. Pay off the high-cost credit card bills, the installment loans for those new windows and the car notes, before retiring.
Then, Kelly adds the zinger: Spend like you’re a retiree when you’re still collecting a paycheck.
“Learn how to say no, so people are prepared when you enter retirement,” said Kelly, author of #MoneyChat and a financial coach in Farmington Hills.
She prompts the group to repeat after her and say: “I’m on a fixed income.”
“Just practice saying that, ‘You know I’m on a fixed income.'”
Why tell anyone that? It’s one way to hold the line on how much money you hand adult children, grandchildren and family members. One outcome of being able to live on less — or give less — is that you are able to save more. Another? Forcing yourself to skip the trip to the outlet mall or cook at home seven nights a week could lead you to conclude that you need to try to keep working a few more years.
No one, honestly, wants to get a jump on living like a budget-conscious retiree. Most of us don’t want to be told that we should hold garage sales, start a garden to grow our own vegetables, or make a sandwich every day for lunch to prepare for retirement.
But experts say it’s a worthwhile exercise to get a better grip on how much money you’re burning.
“People are going through retirement and they’re having to go back to work,” Kelly said. Some, she says, don’t realize how little some employers cover when it comes to medical benefits in retirement. Or they don’t pay attention to how much their children are costing them.
“Our kids can be a burden,” Kelly said.
The AARP’s 10 steps online to prepare for retirement offers: “Step 7: Create a retirement budget.”
“Your retirement may be right around the corner or years away,” the AARP notes.
But the site suggest it’s never too early to cut expenses.
“Maybe you don’t need 100 cable channels or to eat out three nights a week. Even cutting one movie night a month can bring you closer to your retirement goals,” the AARP tip noted.
“Got a green thumb? Growing your own vegetables can save you money that can be socked away for retirement.”
Cheryl Pettway, 57, said the idea of living on less before retirement makes sense.
“You might as well get used to it,” said Pettway, who works for the Michigan Department of Health and Human Services.
“If you eat a little less, you won’t be as fat or as poor.”
Pettway, who lives in Oak Park, has already cut her cable bill down to the basic channels. But now she’s going to tackle some credit card bills and plans to boost her retirement savings at some point with contributions to a Roth IRA. Someone 50 and older who is working can contribute up to $6,500 into a Roth IRA in 2016. The limit is $5,500 for younger workers.
How much money you can contribute to a Roth — or if you can contribute at all — is based on some fairly high limits for your modified adjusted gross income. A single person, for example, who has a modified adjusted gross income of $132,000 or more in 2016 cannot contribute to a Roth.
Too often, Pettway said, many people don’t take time to save more money for retirement or review expenses a few years before they retire. She’s getting things in order nine years before she plans to retire.
“If your expenses are less, you have a better chance of surviving retirement,” said Pettway, who attended the Building MI Financial Future seminar in Livonia. The annual event was developed by the state of Michigan Department of Insurance and Financial Services to help people tackle their finances.
Melissa Seifert, AARP Michigan Associate State Director for Governmental Affairs, said many people just guess at how much money they’d need in retirement. She too suggests creating a budget and living on that fixed income way before you retire.
“You don’t go to the DSW to buy shoes. You don’t go to Starbucks every morning to get that latte,” Seifert told the group at the Building Mi Financial Future retirement event.
Sure, if you were a little less stressed, you wouldn’t need the caffeine fix. And you might not tell yourself that you need new shoes, either.
But it is not enough, experts say, to imagine that all your shopping therapy and big expenses will disappear when you quit that job. Sure, you’re not spending as much on transportation and maybe other work-related expenses, like uniforms or suits.
But did you ever imagine that, maybe, you could actually spend like wild when you’re retired?
In the first two years of retirement, 45.9% of households spent more money than they had spent just before retirement, according to a report by the Employee Benefits Research Institute, a nonpartisan, nonprofit group that focuses on retirement, savings and economic security issues.
More shocking: In the first two years of retirement, 28% of households spent more than 120% of their pre-retirement spending.
People who spent more weren’t necessarily financially well-to-do retirees.
Maybe it’s because people feel that after working all those years, they deserve to splurge and take that big trip or join friends for a round of golf more frequently. But it’s also possible people are sitting at home looking at an ugly kitchen thinking, “Hey, I should do something about this.”
Banerjee said many people spend money on upgrading their homes or taking care of long-needed fixes, like a new roof.
“The data also shows that this post retirement spending bump gradually goes down,” he said.
Making sure that your money lasts as long as you live, of course, depends on how much retirement savings you build in advance, how generous your pension plan and benefits are and, unfortunately, how much you spend.
By trimming back here and there in your 40s or 50s before you retire and stop working, it’s possible to build a stash of cash to take those long-awaited retirement trips that mark many “bucket lists.”
At the retirement seminar, Kelly suggests that those in the group think carefully about where they want to go and how they really want to travel in retirement.
“Do you want to be on the Greyhound or the airplane?” Kelly asks.
Are you willing to test drive your retirement budget? If you do, how do you think that you will measure up? Do you think knowing ahead of time how much you can really spend will make your transition to retirement less stressful?
I believe that running out of money during retirement is, for most people, the biggest worry before and during retirement. Planning ahead, including a test drive, is the best way to minimize this risk.